What is a home loan pre-approval and how long does it last?

Getting a head start in any game is a major advantage. Buying a home is no different — the odds favour those who have done the groundwork.

Home loan pre-approval can be your ticket to making the buying process easier and getting you into a home sooner.

What is home loan pre-approval?

Home loan pre-approval, as the name suggests, is when a lender agrees, in principle, to provide a borrower with a home loan of a specified amount.

Different lenders may call it by different names — conditional approval, indicative approval, approval in principle — but it essentially means that a borrower has taken a preliminary step in the home loan application process.

Pre-approval essentially signals that your application fits the lender’s lending criteria. In practical terms, it can provide you with an idea of how much you'll be able to borrow and gives you confidence as to what you'll be able to afford when scouring the property market.

How long does home loan pre-approval last?

How long a loan pre-approval lasts depends on the lender. For most banks and lenders, it usually stands for between 60 and 90 days.

While two or three months may seem like a substantial period in which to find a home, it may not happen for a prospective buyer in that window.

At the end of your pre-approval period, if you still haven’t found a suitable property, you might need to reapply for another pre-approval. Your lender will also need to reassess your updated financial circumstances at this time.

How long does it take to receive home loan pre-approval?

How long it takes to secure home loan pre-approval can vary, depending on the lender and the complexity of your individual circumstances. Getting pre-approval may take a few business days for some while for others it might take a few weeks.

You can help speed up the process by providing all the relevant documentation and accurate information when requested.

What are the advantages of getting home loan pre-approval?

In addition to providing an idea of the price range you should be considering, home loan pre-approval could give you the jump in the home buying market. Here’s how:

1. Being pre-approved gives you an edge at auction

Being pre-approved for a home loan is essential if you’re planning to participate in an auction. If you successfully bid on a property at auction, you’ll be committed to buying it - or lose your deposit. Home loan pre-approval allows you to bid confidently and helps ensure you don’t bid more than the amount your lender is prepared to lend you.

However, pre-approval isn’t a guarantee that you’ll get a home loan. Bidders be warned that your lender will likely want information on the property you’re purchasing and more comprehensive documentation of your financial situation before it hands over any funds.

2. Being pre-approved can help you negotiate a private sale

Home loan pre-approval is also useful when you make an offer for a property sold through a private sale. Having pre-approval can mark you as a serious buyer who has a strong chance of being able to meet the offered amount. This can boost your negotiating power and give you an edge over other prospective buyers who don’t have pre-approval in place, as a seller may assume their offers could fall through due to finance.

3. Pre-approval can save you time and effort when house hunting

As mentioned previously, pre-approval gives you a good indication as to how much you can afford to repay. Having a clear idea about what you can borrow will help you target homes that fit your budget, ultimately making your search for a property more efficient.

How to apply for home loan pre-approval

You can generally apply for home loan pre-approval by visiting your preferred lender’s website and requesting to be pre-approved.

Each lender will have slightly different processes when assessing an applicant for pre-approval, but generally you’ll need to provide:

• Identity documents

• Recent bank account statements detailing your spending habits and any deposit you’ve saved

• Information on any assets you hold

• Information on liabilities

• Credit card statements

• Proof of income

• Breakdown of living expenses

Is it better to apply for pre-approval online or in-person?

Whether you apply for pre-approval online or in-person is up to you. You can generally go through an online pre-approval process and simply upload all relevant documentation, or you may prefer to apply face-to-face if your lender offers such an option.

Some lenders also offer online tools to give you an idea of how much you’ll be able to borrow. It’s worth noting these aren't official pre-approvals and are merely indications of how much you may be able to borrow based on the information you provide. You’ll still need to go through a pre-approval process to be certain.

When your lender makes its assessment and finds you’re eligible for pre-approval, it will issue you with a formal document, dated and signed, outlining the product you’re pre-approved for, the amount it’s willing to lend you in principle, and the conditions attached to its assessment.

Why would a bank reject a home loan pre-approval application?

Before you apply for home loan pre-approval, you should be aware of common reasons that pre-approval applications are rejected. That way, you can ensure you meet the criteria before you apply.

If you tick one these boxes, there’s a high chance your application for pre-approval could be rejected:

• You can’t properly prove your income
  A lender is unlikely to promise a person a home loan unless it can see that person can meet their repayments

• Your credit score is low
  It’s worth noting pre-approval and previous loan applications appear on your credit history and may have a negative effect on your credit score, so apply for them judiciously.

Does a pre-approval guarantee you home loan approval?

Many prospective home buyers may not realise home loan pre-approval only provides an indication that a lender may approve you for a mortgage when you submit a full application. However, a lender isn’t obliged to approve you for a home loan, even if offered you pre-approval. At the same time, you’re not obligated to apply for a home loan with that lender if a better deal comes along.

Some reasons a lender might reject a home loan application, even if an applicant was pre-approved include:

1. Your financial situation has changed recently

A new job, a big purchase, or a major life event could alter your financial status, which might impact your chances of home loan approval. If your circumstances change after your pre-approval is granted, your lender will re-assess your application to see if you still meet its lending policies. Sometimes you may not.

2. The lending policies of your preferred lender have changed

Some lenders may honour pre-approval applications submitted before their lending policy changed, but many will not.

3. Interest rates have increased

Lenders use the central bank's official cash rate to determine the cost of their home loans. When lenders give pre-approval, they typically extend to borrowers the maximum loan amount possible. However, if the cash rate and interest rates go up during that time, your borrowing power will likely take a hit. That means you mightn’t be approved to borrow the amount you were pre-approved for.

4. The property you're planning to buy is considered risky

Property assessments are not included when you apply for home loan pre-approval. Many lenders have policies regarding the type of properties they’ll finance. Buying a home in a flood zone or a bushfire-prone area might thwart your chances of getting a home loan. Some lenders may also avoid certain suburbs, small apartments, or hobby farms.

5. The lender's insurance provider rejects your application

If you’re hoping to borrow more than 80% of a property’s value, you’ll probably have to pay for lenders' mortgage insurance (LMI). If that’s the case, your application will also need the approval of the LMI provider and its guidelines might be different to your lender’s.  

Sourcing an alternative home loan

If you’re rejected for a home loan after being granted pre-approval, all is not lost. There are many lenders and products on the home loan market that may be a better fit for your financial circumstances.

A mortgage broker can help you obtain mortgage pre-approval or steer you towards a lender or home loan product that may be better suited to your circumstances and needs. Sometimes you may be directed to specialist lenders who might be more inclined to account for your individual financial situation.

You can also do your own market research, starting with the table below, which features some of the most competitive interest rates on the market right now:

Important Information and Comparison Rate Warning

Image by Vitaly Gavier on Unsplash